Article Posted on 05/29/2019
Tax reform could lead to more accumulated-earnings-tax audits. It can be avoided but you need to plan
Here is why you may fall into this trap. The 2017 tax law reduced the corporate tax rate to 21%. This low rate, when compared with the 37% top individual rate, makes C corporation status beneficial, especially for firms that retain earnings rather than pay dividends to their owners.
The accumulated earnings tax is 20% of earnings accumulated in excess of the larger of $250,000 or accumulations needed for reasonable business reasons, such as growth of the firm, debt retirement, shoring up the firm’s pension plan or loss of a principal customer. The minimum accumulation for service corporations is smaller…$150,000.
We watch this closely for our corporate clients. Be sure to document the business purpose for accumulating earnings. Include a description of plans and decision-making processes in corporate minutes and budget forecasting documents, to the extent that significant funds are set aside to satisfy the auditor if he or she comes calling.